Bull Bear Report Dec 16 2009

The Anatomy of a Bonus

By julie steinberg

Bonuses are projected to be fatter this year for many senior investment bankers in line for performance-based incentive pay, but they won't necessarily put more money in the bank than in years past.

Why? The changing structure of bonuses means that a greater portion of their rewards will come in the form of stock -- and that stock may be likely to take even longer to vest than equity awards in the past.

The changes apply more to employees with greater seniority and higher pay than lower-level employees.

For example, an upper-midlevel employee at a financial-services firm who pocketed a $600,000 bonus last year probably received about 20% of it in stock and the rest in cash, according to Michelle Vitale, a senior analyst at compensation-consulting firm Johnson Associates. This year, the stock portion for a similarly-sized bonus would likely be closer to 25%, she said.

Generally the higher an employee's compensation, the greater the portion of his or her bonus that will come in the form of restricted stock. This trend was already underway in 2008.

The incentives structure for employees at JPMorgan's Treasury Services division last year is a case in point.

For instance, in 2008, an employee receiving a bonus of less than $20,000 would receive 100% of it in cash, according to an internal company document reviewed by FINS. For those receiving bonus pay of $20,000 to $100,000, 90% would be given in cash and 10% in restricted stock units vesting in three years, the document showed. A midlevel employee receiving a bonus of more than $100,000 could expect to receive 40% of his or her bonus in cash and 60% in restricted stock units vesting in three years, according to the document. A spokesperson at JPMorgan declined to comment.

What's more, at many firms, retention is playing a greater role in bonus design, according to Alan Johnson, managing director of Johnson Associates. "If the equity takes three or four years to vest and, if you leave the firm before it does, you lose it," he said.

Bigger deferral rates for compensation are becoming the norm in the wake of industry regulatory guidance that has effectively forced financial firms to move more bonus pay into stock. For example, said Vitale, in 2008, a group head who received a $1.7 million bonus would have seen 35% of it in deferred compensation. In 2009, he or she would see approximately 45% deferred compensation for the same amount.

The changes also come partly in response to public outrage over jumbo Wall Street pay packages as firms seek to head off political pitchforks.

JPMorgan, for example, is attempting to create larger base salaries and smaller bonuses, hoping to deflect attention away from bonus pay amounts, which have become a populist flashpoint, according to a firm employee familiar with the matter. A recent memo sent to employees said the firm is working on plans for larger base salaries that will give employees more stability. The upshot: Employees would be able to depend on their salaries no matter what rule changes on bonus pay come down the pike.

Regardless, bonuses will likely remain a hot-button issue for years to come. This holiday season, those who had a "nice" year on Wall Street will be richly rewarded, despite how "naughty" they might seem to populists.

Write to Julie Steinberg


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